A Primer on Foreign Aid – 3: Real Issues

We are now in a position, having described the evidence (A Primer on Foreign Aid – 2), to discuss the less obvious dimensions of foreign aid which address issues of whether aid can be effective and under what kinds of conditions.

The Effectiveness of Aid

There has been much hand-wringing over the disappointing results of aid and many international conferences and meetings have been convened to devise mechanisms to increase its effectiveness. Over time many civil society activists have begun to entertain doubts about their purpose and intentions. It does not seem plausible that some of the leading minds in the world are unable to figure out the basic problems in the aid syndrome, the gross misalignment of incentives, and the vested interests that benefit from a continuation of the status quo give or take some marginal changes.

On the contrary, they have come to share the perception of the person in the street who is convinced that there are other dimensions of foreign aid that are not being talked about. It was always the case that donor country commercial and business interests were linked with bilateral assistance. Most of this assistance (appropriately called ‘tied aid’) mandated the selection of goods and services from the donor country irrespective of their price and quality. These included consultants, contractors, equipment, means of transport, etc.

But the man in the street increasingly notices links between development assistance and the promotion of political interests of donor countries. To some extent the emerging narrative in the case of bilateral aid to Pakistan substantiates this perception. The debate in the US Congress, first about expanding aid to Pakistan for very specific reasons and then questioning its rationale because Pakistan is not considered an adequate partner, illustrates the linkage between aid and politics. The fact that American aid to Pakistan in the past has always grown during periods of military rule also supports the perception. The much less noticed Saudi assistance has been tied to the propagation of a certain type of religious ideology and the increasing quantum of new aid from China is also unlikely to put the interests of the recipient ahead of those of the donor.

Multilateral assistance to most small countries has been tied to the acceptance of certain economic policy frameworks deemed beneficial to the promotion of global markets often at the cost of local welfare – the term ‘Washington Consensus’ came to signify this set of market-oriented policies. But much more damning is the fact that multilateral agencies have continued for extended periods to lend to authoritarian governments whose corruption and anti-people stance was beyond the shadow of doubt. This has been detailed convincingly in a recent article (Foreign Aid for Scoundrels) by Professor William Easterly who calls it the ‘dirty secret’ of the international aid system. In the light of this evidence, it is difficult to accept at face value the claim that foreign aid is aimed at the promotion of democracy, the alleviation of poverty or the general welfare of citizens. To a lesser or greater extent, larger political imperatives seem to impinge on the agenda of foreign aid.

The Reality of Foreign Aid

Those questioning the imperatives of foreign aid have begun to raise a number of issues. First, if capital were indeed all it took to solve social problems of poverty and discrimination, the US, for example, should have been able to eliminate them easily on its home grounds. Yet, even in its capital territory (the District of Columbia), there are areas of such poverty that they are virtually no-go zones for residents of well-off neighborhoods. The state of inner city schools in the US is well known and the health indicators of minority populations, especially of the Native Americans despite their small numbers, are quite stark. If the US has not been able to address these problems at home what credibility does USAID have of addressing them in the much more difficult circumstances of poor countries?

Second, the fact that discussion of foreign aid in donor countries is seen as being tied not to development but to a campaign to win ‘hearts and minds’ and an obsessive reading of poll numbers showing the extent of anti-donor country sentiment in recipient countries suggests a clear linkage between aid and the promotion of national interests. A commercial bank, on the contrary, would not be concerned whether borrowers love the management of the bank or not; the only issue would be whether the loan yields returns adequate for repayment on time.

Third, despite all the rhetoric about hearts and minds, the fact that aid continues to flow to authoritarian governments with acknowledged anti-people policies confirms that assistance is not intended solely for its stated purpose.

Many have begun to see a parallel between foreign aid and the phenomenon of bonded and indebted labor that used to be common in the rural economies of some countries. The landlords lending money to the peasants had no intention of the latter developing out of the dependent relationship. Rather, the aim was precisely the contrary; to keep them in a state of perpetual servitude as the debt increased from one generation to the next. The promise of debt forgiveness could always be used as an additional lever for compliant behavior.

Indirect Distortions Resulting from Foreign Aid

Pursuing this line of argument, activists have begun pointing to the distortions caused in the recipient countries by the dependence on foreign aid. The most obvious is the burden of debt that continues to grow as an obligation on citizens of the present and future generations because of the poor use of the funds. For example, close to half the total resources raised every year in Pakistan go to meet the annual repayments on past debts. But more importantly, a dependence on aid can turn the governance and accountability framework completely on its head. Governments surviving on aid feel less accountable to their own citizens and more accountable to external donors, both countries and institutions. Government functionaries spend less time interacting with their own citizens, who are palmed off with continued tall promises, and more time with officials of donor agencies.

Citizens have ceased to matter to governments dependent on external transfers. Without the constant infusion of easy money, governments would be forced to develop a compact with their own citizens whereby the latter would contribute to the running of the country in return for tangible improvements in their lives. Governments would also be forced to tailor national and local priorities in accordance with the needs of the citizens rather than accepting any development fad that is important to donors at a particular time.

Can Foreign Aid Work?

After this extended discussion, it may come as surprise to the reader that the principal blame for the state of affairs in countries like Pakistan rests indirectly on the citizens of Pakistan and directly on their governments. The salient fact of relevance is that none of the aid, whether in the form of grants and aids, is imposed on recipient governments against their will. The governments accept it willingly and knowingly on behalf of the citizens they are supposed to represent. If they then misuse, waste or embezzle the resources they are entirely responsible for that outcome.

It can be argued that it is the ethical responsibility of donors not to transfer resources to governments that are unrepresentative, excessively corrupt and grossly inefficient. But we live in a world where narrow self-interest is the accepted norm and such ethical conduct cannot be expected as a matter of course. It is ultimately the responsibility of the citizens of a country to ensure that resources acquired in their name are not misused. Unless the citizens demand effective accountability, the prevailing paradigm is unlikely to change.

This perspective also explains the exceptions to the narrative described in this discussion. There are indeed countries where external assistance has played a significant role in national development to the point that such aid is now no longer necessary or a decreasingly small proportion of the size of the national economies. Countries in East Asia are the standout examples. South Korea, Taiwan and Malaysia were all major recipients of foreign aid at one time and have developed to the point where they no longer need such assistance and are able to attract private investment or borrow commercially for their needs. China is a more recent example of the same. In all these cases, there were internal conditions that placed the governments in situations where they needed to deliver economic growth in order to retain the confidence of their citizenry. In addition, the governments were also independent enough to be able to negotiate the development priorities with the donors. Thus there was some sort of a compact with citizens and a balance of power with donors.

Conclusion

The exceptions mentioned above suggest that aid can indeed play a positive role in national development. Conceptually this should not be difficult to accept; concessional funds if used for appropriate investments should generate returns that leave a positive surplus after repayment. But this is a very big if. What are the conditions that ensure the funds would be used well? Either the governments have to find themselves in situations where they have to deliver results to retain legitimacy or the citizens have to exert sufficient accountability to force them to act in the national interest. And in either case, the governments have to negotiate with donors on equal terms intellectually, technically and ethically.

The fact of the matter is that many governments in developing countries have sold themselves to external donors in return for political support while individual functionaries, often unqualified for the tasks they have been assigned, have done so for personal privileges. Citizens have not found the will or the means to hold them accountable. In such situations, foreign aid cannot be expected to yield consistently positive results. Rather, as in the case of indentured labor, the burden on the citizens would continue to increase; the ‘landlords’ and ‘overseers’ would extract as much of the surplus as they can and flee to their overseas abodes if and when they determine they can no longer do so. At that point they would leave a broken, bankrupt and mortgaged country behind.

The problem is not with foreign aid but with forms of governance in which citizens, in both donor and recipient countries, are unable to have sufficient say on the terms on which aid is negotiated or the ability to hold their representatives and leaders accountable for how it is used. This is an ethical issue in donor countries but a much more pragmatic and serious one in recipient countries where the role of foreign aid in politics and economics is proportionately much larger and affects citizens in very direct ways. The challenge remains to make recipient governments answerable to their domestic constituents and not to their foreign benefactors. It is hoped this primer would motivate civil society activists to come together to address this challenge.